Joshua Jarrett sued the IRS in 2021 arguing his Tezos staking rewards weren't taxable income upon receipt — they were "newly created property" that shouldn't be taxed until sold. The IRS initially refunded Jarrett's tax payment in 2022 (avoiding court ruling on the merits), but then issued Revenue Ruling 2023-14 explicitly stating that staking rewards ARE taxable income upon receipt and control.
Jarrett continued the litigation seeking definitive court ruling. The case continues moving through courts through 2026 with various procedural developments. Specific outcome remains uncertain.
For typical crypto stakers, this matters because the tax treatment of staking rewards substantially affects after-tax staking returns and timing of tax liability. If Jarrett ultimately wins and creates favorable precedent, retrospective tax positions may need adjustment. If IRS Revenue Ruling 2023-14 holds as definitive interpretation, current standard treatment continues.
This piece walks through the legal dispute, current IRS position, what specifically constitutes "control" for staking reward income recognition, and practical filing position recommendations for 2026 tax year.
The Core Legal Question
Tax law generally requires income recognition when:
You receive economic benefit that is taxable.
You have control over the benefit (can dispose of it).
The benefit has determinable value at time of recognition.
For staking rewards, the questions are:
When exactly does the staker receive economic benefit? Some argue at validator credit, others at distribution to user wallet, others at unlock.
When does staker have control? Locked staking might delay control until unlock. Liquid staking may have continuous control.
What's the value at recognition? Crypto prices fluctuate; specific FMV calculations have timing complications.
Jarrett's position: staking rewards aren't received income but rather newly-created property similar to a baker baking bread. The bread isn't income upon baking; only when sold. Staking rewards similarly should only be taxable upon sale, not creation.
IRS position (Revenue Ruling 2023-14): staking rewards ARE taxable as ordinary income at FMV when received and controlled. The rewards are services-related income similar to compensation, not newly-created property exempt from immediate taxation.
The conflict reflects genuine tax theory disagreement, not just regulatory aggressive interpretation.
Where The Litigation Stands
Through Q1 2026:
Initial Jarrett case settled procedurally in 2022 when IRS refunded payment. Specific merits weren't ruled on by court.
Subsequent Jarrett litigation continues seeking definitive court ruling on tax treatment principles.
Various procedural rulings through 2024-2025 have addressed standing, jurisdiction, scope of relief sought.
Substantive ruling on staking reward taxation timing hasn't yet occurred at appellate level.
Revenue Ruling 2023-14 remains controlling IRS interpretation in absence of definitive contrary court ruling.
Some commentators expect Jarrett-style litigation to eventually produce appellate ruling potentially favorable to staker position. Timeline uncertain — could be 2026, could be 2028, could be later.
For current tax filing, IRS Revenue Ruling 2023-14 governs. Staking rewards are taxable income at receipt unless and until contrary court ruling changes the framework.
What Constitutes "Control" For Recognition
Specific timing of "received and controlled" requires analysis:
For solo Ethereum validator staking: rewards typically credited to validator address with some delay before withdrawable. Conservative interpretation: income recognition when withdrawable from validator. Aggressive: income recognition when credited even if not withdrawn.
For Lido stETH (rebasing token): balance increases continuously. Conservative interpretation: each daily rebase is taxable income. Practical reality: most users treat as accumulating cost basis without continuous income recognition due to operational impracticality.
For ether.fi weETH (non-rebasing yield token): underlying value increases without balance change. Income only recognized at sale or redemption.
For Coinbase or Kraken staking products: rewards distributed to user account periodically. Recognized at distribution.
For Solana staking: rewards distributed at epoch boundaries. Recognized at epoch reward distribution.
For Cosmos ATOM and similar PoS tokens: rewards typically credited continuously. Recognition timing varies by specific implementation.
The "control" question doesn't have single universal answer. Different staking mechanisms have different operational characteristics affecting income recognition timing.
Practical Filing Positions
Three reasonable filing positions exist for staking reward taxation:
Position 1 (most conservative, lowest audit risk): recognize all staking rewards as ordinary income at FMV when received per IRS Revenue Ruling 2023-14 strict interpretation. For continuous-rebase tokens like stETH, recognize daily income.
Position 2 (moderate, common practitioner position): recognize staking rewards when transferred to user-controlled wallet or when withdrawable. For rebasing tokens, recognize at unwrap/sale rather than continuously.
Position 3 (aggressive, higher audit risk if Jarrett doesn't ultimately succeed): treat staking rewards as newly-created property not taxable until sold per Jarrett argument. Document position carefully.
Most crypto tax practitioners recommend Position 2 as practical balance. Position 1 is operationally impractical for many staking situations. Position 3 has substantial audit defense risk if IRS challenges and Jarrett doesn't prevail.
For users specifically wanting Position 3, the strategic considerations:
Document position clearly with tax preparer. Maintain detailed records of staking activity that would support the position if challenged.
Consider specific holding period strategies. If staking rewards aren't recognized as income, holding period for capital gains starts at staking creation, potentially capturing long-term treatment faster.
Be prepared for potential audit. Position 3 has stronger audit risk than mainstream interpretations.
If IRS challenges and Jarrett position doesn't ultimately prevail, you may face additional tax plus interest plus potential penalties.
For most users, mainstream Position 2 is appropriate. Position 3 is strategic choice for users with substantial staking income willing to accept audit risk.
Specific Implications By Staking Method
For solo ETH validator: continuous reward accrual creates frequent small income events. Track each reward distribution for accurate income recognition. Specialized tax software helps.
For liquid staking (stETH, weETH): document chosen position consistently. Most practical: recognize income at unwrap/sale rather than continuously, with appropriate documentation.
For Coinbase Earn or similar exchange staking: 1099-DA from exchange typically reports staking income clearly. Standard ordinary income treatment.
For multi-chain staking (Solana, Cosmos, Polkadot, etc.): each chain has different reward distribution mechanics. Specialized crypto tax software handles multi-chain staking.
For DeFi yield with token rewards (CRV, AERO from gauge incentives): each reward distribution is income event. Track at FMV when received.
For complex restaking situations (EigenLayer rewards through LRT): multiple income event categories from base staking + AVS rewards + LRT-specific incentives. Complex tracking required.
My Filing Position
For my own staking activity, I use Position 2 (moderate interpretation):
Liquid staking products (stETH, weETH): recognize income at unwrap/sale, not continuous rebase.
Direct exchange staking (where applicable): recognize at distribution per 1099-DA reporting.
DeFi token rewards: recognize at receipt at FMV.
Restaking AVS rewards: recognize at receipt at FMV.
Document positions consistently with tax preparer. Maintain records supporting position.
For users considering Position 3 (Jarrett aggressive): consult tax attorney before adopting. Risk profile requires specific analysis of your situation.
For users wanting maximum audit safety: Position 1 conservative interpretation eliminates most audit risk but creates substantial operational tracking complexity.
What To Watch Going Forward
Specific developments that could change staking tax landscape:
Definitive Jarrett-style appellate ruling. Could go either way and would affect tax treatment significantly.
IRS additional guidance on specific staking mechanisms. New revenue rulings could clarify or change current treatment.
Legislative changes to crypto tax framework. Congress could act on crypto tax treatment with substantial impact.
Treasury Department Treasury Regulations on digital asset taxation. More authoritative than revenue rulings; could change framework substantially.
International tax treatment evolution. US tax positions may shift in response to international crypto tax practice convergence.
For now, mainstream tax practice continues with IRS Revenue Ruling 2023-14 governing. Watch for changes that might affect filing positions for 2026 tax year.
The honest summary: staking reward taxation isn't fully settled. Current IRS position is clear (taxable at receipt) but contested. Most practical filing position is recognize at receipt or unwrap with appropriate documentation. Aggressive Jarrett-style positions exist but carry audit risk.
For substantial staking income, work with crypto-specialized tax professional. Don't rely on generic tax preparation for nuanced staking situations.
A few sourcing notes: legal dispute details from public court filings, IRS Revenue Ruling 2023-14, crypto tax practitioner publications through April 2026. Specific filing position recommendations reflect mainstream practice; your situation may differ. This is general educational content not specific tax advice. Tax law and IRS interpretation continues evolving; positions may need to be reconsidered as legal landscape changes.